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Russia's Transneft - Benign Monopoly or Extortionist?

By any yardstick’s Russia’s Transneft pipeline company is an impressive organization. Now ostensibly a Joint Stock Company, the Russian government owns 75 percent of its shares.

Created in 1993 as the successor to the USSR’s Minnefteprom’s Glavtransneft, Minnefteprom USSR, Transneft now has more than 84,000 employees and manages more than 31,000 miles of pipelines ranging in size from 16 inches to more than four feet in diameter, now transporting 93 percent of all oil extracted in Russia. All oil trunk pipelines except Caspian Pipeline Consortium are owned and operated by Transneft and oil products pipeline are owned and operated by its subsidiary Transnefteprodukt.

And it is this very lack of accountability to Russia’s myriad energy companies that is now beginning to chafe.

On 1 September Russia’s Federal Service on Tariffs governing board approved raising the tariff on oil transport by 5 percent as of 1 November, the fourth increase in Transneft’s services in the past two years. Russian energy analysts note that the increased pipeline expenses may in turn spur growth of gasoline prices.

The biggest Russian oil company is state-owned Rosneft. A second state-owned company is Gazprom Neft. Russia’s private oil companies include Lukoil, Russia's largest oil company and its largest producer of oil; TNK-BP, created via 2003 merger of BP Russian operations with Tyumen Oil; Western Siberia’s Surgutneftegaz; Tartarstan’s Tatneft; Bashneft, an oil refining company and one of Russia’s largest producers of oil products; Russneft and Itera International Group of Companies.

All have ended up as hostages of the monopoly, and the partial privatization of Transneft failed to stop the growth of prices of services, much less create competition in the field of pipeline network construction and operation, with the result that the oil companies see little relief from arbitrary price hikes in the foreseeable future.

Even the modest Ministry of Economic Development proposals for selling 10 percent more of Transneft's shares in 2012 and another 18.1 percent in 2013, with the Russian government ultimately retaining a controlling interest of 50 percent plus one share, have been fought tooth and nail by the Ministry of Energy.

As a result, Transneft and its 32 subsidiaries are free to fleece Russia’s private energy companies, which nonetheless have to operate on market principles, not only paying their shareholders but fulfilling their tax obligations as well.

And the scalping of the energy companies to use Transneft’s monopoly of pipelines is likely to continue, as the company has already borrowed $19.1 billion for the construction of pipelines. Transneft in fact partially justifies its rate increase by the need for large capital investments into development of both the Baltiiskaia truboprovodnaia sistema (Baltic Pipeline System), with a capacity of 74 million tons annually, and the Vostochnaia Sibir’-Tikhii Okean (Eastern Siberia – Pacific Ocean) pipeline, with an annual capacity of 30 million tons.

Other arguments used by Transneft to justify fee hikes include the costs of upkeep of the existing infrastructure, increased costs for electricity and even the growing terrorist threat, requiring Transneft to equip its facilities with protective systems.

The ultimate result of the price hikes will be a rise in Russian gasoline prices, with one analyst predicting that they will increase by 10-15 percent by the end of the year, with high Transneft tariffs being a component.

Twenty years after the implosion of the USSR, the successor Russian government is still trying to have it both ways, freeing up and privatizing sectors of the economy while retaining control of those deemed, for whatever reason, as strategic, and the Transneft pipeline monopoly remains one of those.

But the larger world is changing. While Russia vies with Saudi Arabia for the title of largest oil producer in the world, producing an average of 9.93 million barrels of oil per day in 2009, which translated to 12 percent of the world's oil exports, competition is rising in the wings everywhere from Africa to Brazil, where the governments do not regard their oil companies struggling to boost their overseas market share as a renewable commodity to be fleeced by an increasingly inefficient government monopoly.

what astonishes me about Mr Daly and his commentaries is how little he seems to understand the world outside of the US and its market economy. Most countries outside of the US operate on some mixture of market economy and state intervention, depending on history, psychology, and circumstance. It is far too simplistic just to have a go at countries that have regimes that are and have been far more controlling than the US would like them to be. Understanding, especially from the other guys point of view, is far more intelligent than simplistic criticism. Mr Daly, please bear this in mind.

Anonymous on September 10 2011 said:

Competition in some of the energy industries doesn't make a lot of sense to me. This pretending that oil companies and pipelines are supposed to resemble the organizations in the early chapters of your Econ 101 textbooks is absurd. Absurd but it happens, and some of the persons with these crank ideas are teaching economics.

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